Wednesday, December 24, 2008

401(K) Even Less Appealing

The sale of the 401(K) as a retirement plan has been one of the biggest scams ever sold to American workers. While I also fully participate in my own company's offering (since pensions are no longer available, there is no choice), I understand the scam. Retirement is no longer a part of employment; we now shoulder the majority of the funding ourselves -- and we all have to be semi-pro financial planners to be able to get anywhere near the benefit our pensions used to provide.

The savings generated by this move is neatly transferred to the upper-management tiers, many of whom still have actual pensions.

But my company has used the current financial crisis as an excuse to change the company match from mandatory to discretionary -- meaning, non-existent. No match for you.

While the crisis is the excuse, you can bet this move will be permanent. I've seen this game before -- when Fortune 500 companies first began phasing out pensions, it was often sold as temporary or half measures. Pensions at first were cut in half and called "portable pensions"; sold to us as a great leap forward as we could "carry" these to other companies in the form of a cash payout when terminated. The catch: less than half the money the traditional model would pay out.

Portable pensions quickly phased out to no pension at all. While I was at Motorola, they could not kill their pension, as they were one of the only companies in the US that gave employees voting rights on changes to the pension.

One day, they presented us with a nice increase in the pension benefit. But there was a couple twists. New employees would be forced into the portable (aka 50% cut) pension model, while the rest of us could choose to go portable or stay in the traditional. Immediately, I was against this plan as it screwed new employees... unsurprisingly, many folks didn't care as long as we got the increase.

But the poison pill in the changes was this: we would have to give up our voting rights, and all future changes to the plan would enacted with no input from the employees. No vote, no veto power.

If ever one were to understand the mind of Republicans, this is a perfect example. You can guess, my fellow employees had no qualms about giving away their rights. Hell, many of my fellow employees were going to voluntary switch to the 50% cut in pension benefits. They ridiculed my tales of doom for our pension plan if this vote passed.

The "free market" will not allow them to dissolve our pension plan, they exclaimed. If they did that, we'd all leave for greener pastures; couldn't I see that?

Of course, all of our competitors were also dumping their pensions or never had one in the first place. And my co-workers said the "portable" pension would be great, as they would take the cash payout if they ever left and invest it wisely, and make more money than Motorola ever would have.

So the plan passed; as I recall, it wasn't even close.

And in less than 5 years, the pension plan was dissolved for us. The board of directors were given new "savings accounts" that equaled the "loss" of their pension plan. We were given a one-time contribution to our 401(K)s.

Studies a few years back have shown that 401(K) participants, unless they are upper managers with company provided financial planners, generally do not earn the same kind of return on their money as the old pension models used to. There are several typical problems with 401(K) participation.

The employee is not trained in investing. The employee is too busy to get the training and create an investment plan to optimize returns. The plan fees are more expensive than self-directed pensions, so less profit is gained over time. The choices tend to be too limited to diversify for knowledgeable investors; or too complicated for those who have never invested before.

So corporations have set out to fix these problems by: restricting choices and removing self-direction from the employees. Put more succinctly, they are putting the old pension model back in place, with one big exception: the employees will still shoulder most or all of the funding. So at the end of the day, the 401(K) has been yet another transfer of wealth from the middle-class to the top ranks.

People hate to hear this. I, too, bought into the hype when 401(K)s first started proliferating -- how we'd all be able to retire millionaires now. I should have known the "we", as always, was the top 5%.